Bewind Trusts
Key Takeaways:
Bewind trusts offer controlled financial management for vulnerable individuals.
They appoint a "bewindvoerder" to oversee and protect the trust's assets.
Striking a balance between autonomy and protection, these trusts cater to unique financial needs.
When discussing trusts (and the possible formation of one), most people associate the terminology with wealthy families looking after their own, especially upon death. And that is not wrong - family trusts (where all the beneficiaries to a trust are family members) do exist and are sometimes used for this very reason
But in South Africa and according to the Trust Property Control Act, 57 of 1998, a trust is defined as
“an arrangement through which the ownership in property of one person is by virtue of a trust instrument made over or bequeathed:
(a) to another person, the trustee, in whole or in part, to be administered or disposed of according to the provisions of the trust instrument for the benefit of the person or class of persons designated in the trust instrument or for the achievement of the object stated in the trust instrument; or
(b) to the beneficiaries designated in the trust instrument, which property is placed under the control of another person, the trustee, to be administered or disposed of according to the provisions of the trust instrument for the benefit of the person or class of persons designated in the trust instrument or for the achievement of the object stated in the trust instrument,
but does not include the case where the property of another is to be administered by any person as executor, tutor or curator in terms of the provisions of the Administration of Estates Act, 66 of 1965.”
Put simply - a trust is a type of legal “structure” (for lack of a better description) which has been set up by the founder(s) of the trust (i.e. the settlor or donor - the person who initiates the trust and who donates the property for another’s benefit) according to their exacting specifications. Usually, property is transferred/assets are transferred to the trust which is then administered by trustees who are nominated by the founder(s) in the trust deed or will (as the case may be) on behalf of one or more beneficiaries. The trustees are responsible for administering the assets in accordance with the trust deed and the laws relating to trusts.
Why would you need a trust?
Mostly for estate-planning purposes.
Estate planning involves putting together and crafting several legal documents and processes that will have the effect of creating and maintaining a lifestyle for you and your family while you are alive and thereafter for your loved ones after your death. Planning your estate, will ensure your loved ones are taken care of. Properly. And forming a trust has a lot to do with this.
Estate planning is crucial if you are married, have been married multiple times, have children from different relationships or support people financially. It will allow the protection of your loved ones from legal stresses and financial insecurity after your death. You have the chance to ensure that your estate duties are minimised and that there is sufficient liquidity to meet your estate's financial obligations upon your death - ultimately ensuring that any inheritances are sufficiently distributed or protected for your younger beneficiaries.
For estate planning purposes, there are a few advantages in placing assets in a trust (generally speaking):
The protection of assets from creditors
The ownership of an asset by a trust can protect a family’s assets from potential creditors. Furthermore, such an asset will not fall into the personal estate of the beneficiary and will therefore also be protected from the beneficiary’s creditors;
Succession planning (a trust does not die)
A trust survives the life of an individual and ca therefore, span multiple generations, ensuring continuity and allowing for seamless succession. On the death of the trust founder, the assets held in trust will not form part of the winding-up process, and this can provide the beneficiaries with ongoing access to funds after the founder’s death. The trust will also not be liable for or subject to estate duty (i.e. the growth belongs to the trust), other taxes or costs, such as transfer duty, executor’s fees, conveyancing fees or Capital Gains Tax (provided the asset is not sold) that would otherwise be payable in the hands of the estate or the heirs.
Protection of assets
A beneficiary cannot sell a right in a trust (unlike shares in a company). Therefore, if a beneficiary becomes insolvent, the assets in the trust continue to be protected. Likewise, if you as the donor or trustee become insolvent, the trust’s assets remain protected.
Tax planning
If correctly set up, a trust can be administered to mitigate estate duty, income tax, Capital Gains Tax, donations tax and transfer duty 9as set out above). Furthermore, if the trust earns R100 000, it can be split between beneficiaries so that they each earn a share of the R100 0000. Assuming the beneficiaries earn no other income, they would pay no tax as this amount is below the threshold. This is the so-called split income principle i.e. income tax is levied against the trust, but income distributed is taxed in the hands of the beneficiary.
Centralised management of assets
Depending on the circumstances of the founder, a trust can be used to centralise and control assets on behalf of beneficiaries who are unable to do so themselves, such as in the case of a mentally or physically handicapped child. A trust is also an excellent vehicle for housing indivisible assets such as a family holiday home or farm on behalf of multiple beneficiaries.
Creditor protection in the event of the trust beneficiary’s insolvency:
As the assets are not owned by either the trustees or the beneficiaries, a creditor would therefore have no claim against them.
There are essentially three types of trusts in South Africa, one of which is a bewind (or vested) trust.
Bewind (or vest) trusts
SARS defines a vested (or bewind) trust as
“Trusts where income, capital gains or assets are vested to a beneficiary in terms of the trust instrument.”
Essentially, the founder (i.e. the settlor or donor - the person who initiates the trust and who donates the property for another’s benefit) transfers ownership of the assets to the beneficiaries of the trust, but administration and control of the assets is given to the nominated trustees.
In terms of a bewind (or vested) trust, the beneficiaries are the owners of the trust assets. The nominated trustees only have administrative control over the trust assets, which they manage solely for the benefit of the beneficiaries. The nominated trustees are not given any discretion in terms of the trust instrument, and the beneficiaries and their benefits are fixed and predetermined.
It is therefore important that the income and capital beneficiaries are clearly determined and described in the trust instrument. Any income and capital gains earned by the trust vest in the beneficiaries.
In other words, the beneficiaries have a personal right to claim their portion of the trust benefits from the nominated trustees at the time of a certain event i.e. upon reaching the age of eighteen.
The income and capital gains are taxable in the hands of the income and capital beneficiaries. In the event of the death of the beneficiary prior to payment, the deceased beneficiary’s interests, i.e. his/her personal rights, are transmissible to his/her heirs and these interests must be included in his/her estate for estate duty purposes (for further information on Estates and Estate Duty read our article here).
The benefit of a bewind (or vested) trust?
Vested rights are acquired by beneficiaries in a bewind (or vested) trust, where the assets vest in the beneficiaries; in other words, the beneficiaries are the rightful owners of the assets and therefore have a right to them, but the administration is taken care of by trustees until, for example, a child turns twenty-five. The beneficiary cannot dispose of the assets until he or she takes over the control over the asset.
What are the disadvantages of a bewind (or vested) trust?
The beneficiaries will be liable for all taxes resulting from the assets. Upon the death of the beneficiary, the assets will be included in his or her estate.
Who is a bewind (or vested) trust ideal for?
A bewind (or vested) trust is ideal for a family where a loved one has dementia or has lost mental capacity in another way.
Under South African law, when a person loses mental capacity, they lose the right to a Power of Attorney, which forces most families down a laborious and expensive road of appointing a curator or an administrator.
Note: when you sign a POA, you give a legal right to someone else to act on your behalf. In South Africa, however, a POA is based on the law of agency, and is only valid if the principal (the person giving the POA) has the mental ability to carefully consider the act in question. So, if that person loses his or her mental capacity due to an illness like dementia, their POA loses its authority.
If the beneficiaries and trustees of the bewind (or vested) trust are chosen carefully, a de facto curatorship can be created without having to hand over control of the estate to a third party. For example, if a spouse develops early onset dementia, a bewind (or vested) trust can be set up where the beneficiaries are the husband and his wife and the trustees are family members they rely on and trust. That makes the entire situation far easier for those needing to provide for loved ones that have a mental incapacity, like dementia.
What is needed to set up a bewind (or vested) trust?
In bewind (or vested) trusts, the trustees are directed by the trust deed as to what percentages the income and capital is to be distributed to the beneficiaries.
The following documents should be submitted to the Master of the High Court in the relevant provincial jurisdiction in terms of the requirements stipulated in the Trust Property Control Act 57 of 1988, in order to have a trust registered -
A cover letter to the Master of the High Court;
Trust Registration and Amendment form (J401);
Two signed trust deeds;
Proof of payment of the Master of the High Court’s fee;
Master of the High Court’s Annexure B form;
Acceptances of trusteeship by trustee (J417) by each of the trustees, including a summary of the proposed trustees’ qualifications and their experience in managing trusts. The Master of the High Court must be satisfied that the trustees will be competent in discharging their duties. If the Master of the High Court is not satisfied, he/she may call for the trustees to put up security and may even insist that the trust be audited;
A declaration by trustees;
A sworn affidavit signed by the independent trustee;
A certified copy of the Identity Document of each of the trustees;
Beneficiaries Declaration (J450), and
An undertaking by the auditor/accountant (J405) to administer the accounting records of the trust in accordance with generally accepted accounting practice.
Note: Please take note that unless the Letters of Authority have been issued by the Master of the High Court, the potential trustees do not have the capacity to function as trustees. Do not enter into any commercial or legal transactions before you receive the Letters of Authority from the Master of the High Court, as those transactions will be invalid.
Why should you trust Benaters with the intricacies of a bewind (or vested) trust?
The complexities around the type of trust you form, or who to appoint as Trustee (especially in light of your overall estate planning process), must be discussed with your trusted legal advisor (such as the attorneys at Benaters) who will be able to advise you on the best way forward - there is just so much to take into account (with numerous applicable legislation), that it is critical for you not to take on this process alone. Seeking the assistance of professionals who have had vast experience in all there is to do with trusts is the only way to go.
If you require any assistance with the formation of a trust or deciding who to appoint as a Trustee, the attorneys at Benaters have in-depth knowledge and are able to assist you with all trust related issues and queries.
We have assisted many individuals and families with their trusts and have been able to successfully support and guide them through the entire process, which has (on a number of occasions) lead to both the administration of deceased estates as well as being the appointed as Trustees.
We are here to help you. In any way we can!
So please, get in touch today and let us see how we can assist you with what is a weighty decision. You can put trust in us too. We will undertake your matter, as always, with professionalism and the utmost due care.